Jazz's core telecom earnings grew 5.5 percent as costs outran sales
VEON has split Jazz from its financial services arm for the first time. The standalone numbers show a network business growing sales by 14 percent while its operating costs rose by a quarter, and the digital side carrying half of the profit growth.
Jazz, Pakistan's largest mobile operator, grew the operating profit of its core telecom business by 5.5 percent in the July to September quarter, on sales that grew 14.1 percent. The gap between those two numbers is the finding in VEON's third quarter results, published on 6 November, which for the first time report Jazz separately from JazzCash, Mobilink Bank and the JazzSure insurer.
Until now VEON gave one consolidated Pakistan figure. It still does: revenue of Rs144.9 billion in the quarter, up 26.6 percent in rupees. That figure flattered the network business, because the financial services arm grew revenue by 67.6 percent to Rs43.4 billion. Jazz's own revenue was Rs103.4 billion, up 14.6 percent from Rs90.2 billion. The two standalone figures do not add up to the consolidated one, because VEON eliminates transactions between them.
Sales grew, margins did not
Jazz's telecom and infrastructure revenue rose from Rs76.8 billion to Rs87.6 billion. Its EBITDA, earnings before interest, tax, depreciation and amortisation, rose from Rs42.4 billion to Rs44.7 billion. That is the 5.5 percent.
The working shows what happened. Revenue minus EBITDA gives operating costs of Rs34.4 billion a year earlier and Rs42.9 billion now, an increase of 24.7 percent. Of every extra rupee of telecom revenue, about 21 paisa reached EBITDA (Rs2.3 billion of profit on Rs10.8 billion of new sales). The telecom EBITDA margin fell from 55.2 percent to 51.0 percent. VEON's release puts the pressure down to annual cost escalations and revenue linked expenses, which partly offset higher prices and data use.
Jazz still earns more per rupee than the group around it. VEON's telecom and infrastructure EBITDA margin across all its markets was 47.2 percent in the quarter, on USD 449 million of EBITDA from USD 952 million of revenue. Jazz's 51.0 percent is above that, but 4.2 percentage points below Jazz's own margin a year ago.
Subscribers, prices and data
The revenue growth came from pricing and usage more than from new customers. Mobile subscribers rose 5.1 percent to 76.4 million. Average revenue per user rose 7.1 percent to Rs320 from Rs298.8. Data use rose 11.7 percent to 8.4 GB per user a month, and 59.5 million subscribers, 77.9 percent of the base, were on 4G or 5G.
One number moved the wrong way. In the second quarter Jazz's average revenue per user was Rs329.8, so the third quarter figure is about 3 percent lower, and the release does not say why. At Rs277.8 to the dollar, VEON's average rate for the quarter, Rs320 is about USD 1.15 a month. VEON puts its group mobile figure at USD 1.8.
Spending on 5G
Capital spending is where the cost shows. Jazz invested Rs19.2 billion in the quarter, up 61.7 percent from Rs11.9 billion, with Rs18.6 billion going to telecom. VEON says the money went to network capacity and 5G deployment following recent spectrum purchases, and that more than 1,000 5G sites have been built so far.
Subtract capex from EBITDA, a rough measure of what the business has left before tax, interest and leases, and the picture is less comfortable. Jazz had Rs32.1 billion this quarter against Rs34.9 billion a year earlier, a fall of 8.1 percent. For telecom alone it fell from Rs30.7 billion to Rs26.1 billion, or 14.9 percent. The company's 12 month capex intensity, capex as a share of revenue, rose to 15.7 percent from 14.7 percent.
The digital side carries the growth
Jazz's own digital services, which include Tamasha, SIMOSA, ROX and FikrFree, made Rs15.7 billion, up 17.4 percent, and 15.2 percent of revenue. Their EBITDA rose 49.4 percent to Rs6.6 billion at a 41.6 percent margin, up from 32.7 percent. By our calculation digital contributed Rs2.2 billion of the Rs4.5 billion rise in Jazz's total EBITDA, 48 percent of the growth from 15 percent of the revenue.
That depends on engagement that can swing. Tamasha had 33.9 million users in the quarter, down from 38.7 million in the second quarter, which VEON ascribes to the end of the Pakistan Super League season. SIMOSA, the SIM care and lifestyle app, grew 22.1 percent year on year to 36.3 million users.
What the split changes
Investors can now value a network business and a bank separately, and the network business looks slower and more capital hungry than the consolidated figures implied. The test over the next quarters is whether telecom EBITDA growth returns to the pace of revenue growth once the first wave of 5G sites is built, or whether higher costs and lower cash after capex become the norm.
The nine month numbers will not settle it. Jazz's EBITDA is up 27.0 percent over nine months, but the third quarter alone grew 9.6 percent, so the year to date figure overstates the current pace. The next check is VEON's capital markets day on 16 November.
